Should You Buy Tesla While It's Below $350?
Key Points
Tesla’s capital expenditures will total more than $25 billion in 2026, pressuring free cash flow.
The company’s ambitious projects face uncertainty around timing and returns.
Even if the stock’s valuation gets cut in half in five years, which is still an expensive level, earnings would need to grow fourfold for the shares to double.
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The market wasn't pleased with Tesla's (NASDAQ: TSLA) Q2 2026 financial results (ended June 30). The business easily beat Wall Street's revenue estimates. However, its profit came in well below expectations, as operating expenses soared 47% year over year.
Since providing the financial update on July 22, this "Magnificent Seven" stock has fallen 20% (as of July 29). And it is no longer in the trillion-dollar club. Sentiment appears to be shifting.
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Should you buy Tesla on the dip while it trades below $350 per share? The answer really depends on your level of optimism regarding autonomous driving and robotics.
Image source: The Motley Fool.
Tesla is spending big on an unknown future
Tesla's financials have taken a turn for the worse. The company's spending has ramped up. Operating costs jumped in Q2, as mentioned. According to Tesla, this was driven partly by the company's "artificial intelligence and other research and development projects."
Capital expenditures are also up and projected to total more than $25 billion in 2026. And they will grow in the coming years.
Free cash flow (FCF) was negative $1.1 billion during the second quarter. The consensus view among sell-side analysts is that this figure will be $11.4 billion in the red in 2026.
Tesla's clear goal is to introduce AI to the real world, so it certainly believes the investments are worth it. The money is being directed to build AI infrastructure, expand Robotaxi (now providing unsupervised rides in six U.S. cities), and ramp up production of Optimus (planned to start later this year).
However, it's not unreasonable to believe that the potential financial payoff from advancements in autonomous driving and robotics is still far off. In the meantime, investors will have to be comfortable with the higher levels of spending and FCF pressure that come, paired with an uncertain outcome.
Here's the math to generate a winning return
Investors should never forget to analyze valuation when making decisions. The price-to-earnings (P/E) ratio, for instance, can reveal market sentiment.
For Tesla, the investment community still looks bullish, as shares trade at an astronomical P/E multiple of 280. The market treats Tesla like a story stock, with the narrative carrying significantly more weight than the business's reality.
Even if we assume Tesla's valuation gets cut in half in five years, the hypothetical P/E ratio of 140 would still be in nosebleed territory in July 2031. In this scenario, diluted earnings per share would need to grow by 300% for the stock price to double over the next five years. That's a high bar to clear.
There are plenty of Tesla bulls who have no issue with this math. I'll take the opposite view. The electric vehicle stock isn't a good buy at or below $350. This perspective can change if the company's profit starts to skyrocket.
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Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.
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